Shannon v Permanent Custodians Ltd
[2020] WASCA 198
•24 NOVEMBER 2020
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
TITLE OF COURT : THE COURT OF APPEAL (WA)
CITATION: SHANNON -v- PERMANENT CUSTODIANS LIMITED [2020] WASCA 198
CORAM: QUINLAN CJ
VAUGHAN JA
TOTTLE J
HEARD: 3 & 4 FEBRUARY 2020
FURTHER SUBMISSIONS ON 16 OCTOBER 2020
DELIVERED : 24 NOVEMBER 2020
FILE NO/S: CACV 98 of 2018
BETWEEN: ANITA LOUISE SHANNON
CHRISTOPHER CHARLES SHANNON
Appellants
AND
PERMANENT CUSTODIANS LIMITED
First Respondent
GEL CUSTODIANS PTY LTD
Second Respondent
AUSTRALIAN MORTGAGE SECURITIES PTY LTD
Third Respondent
AFIG WHOLESALE PTY LTD
Fourth Respondent
REGISTRAR OF TITLES
Fifth Respondent
PEPPER GROUP LIMITED
Sixth Respondent
ON APPEAL FROM:
Jurisdiction : SUPREME COURT OF WESTERN AUSTRALIA
Coram: LE MIERE J
Citation: PERMANENT CUSTODIANS LTD -v- SHANNON [No 2] [2018] WASC 295
File Number : CIV 1174 of 2013
Catchwords:
Appeal - Loan agreement and mortgage - Whether the loan agreement and mortgage were unjust under s 76 of the National Credit Code - Securitisation program where third party correspondent assess creditworthiness of borrowers - Third party correspondent fabricated financial details in the loan application - Lender has constructive knowledge of fraud - Lender failed to inquire as to borrowers' capacity to repay loan - Lender did not observe operations manual under securitisation program
Legislation:
Australian Securities and Investments Commission Act 2001 (Cth)
Consumer Credit (Western Australia) Act 1996 (WA)
Consumer Credit (Western Australia) Code
Contracts Review Act 1980 (NSW)
First Home Owner Grant Act 2000 (WA)
Limitation Act 2005 (WA)
National Consumer Credit Protection Act 2009 (Cth)
National Credit Code
Transfer of Land Act 1893 (WA)
Result:
Appeal allowed
Category: B
Representation:
Counsel:
| Appellants | : | In person |
| First Respondent | : | G D Cobby SC |
| Second Respondent | : | G D Cobby SC |
| Third Respondent | : | G D Cobby SC |
| Fourth Respondent | : | G D Cobby SC |
| Fifth Respondent | : | No appearance |
| Sixth Respondent | : | G D Cobby SC |
Solicitors:
| Appellants | : | In person |
| First Respondent | : | Norton Rose Fulbright Australia |
| Second Respondent | : | Norton Rose Fulbright Australia |
| Third Respondent | : | Norton Rose Fulbright Australia |
| Fourth Respondent | : | Norton Rose Fulbright Australia |
| Fifth Respondent | : | No appearance |
| Sixth Respondent | : | Norton Rose Fulbright Australia |
Case(s) referred to in decision(s):
Australian Securities and Investments Commission v Kobelt [2019] HCA 18; (2019) 93 ALJR 743
Baltic Shipping Company v Dillon [1991] NSWCA 19; (1991) 22 NSWLR 1
Barker v GE Mortgage Solutions Ltd [2013] QCA 137
Beneficial Finance Corporation Ltd v Karavas (1991) 23 NSWLR 256
Buccoliero v Commonwealth Bank of Australia [2011] NSWCA 371; (2011) 16 BPR 30,333
Collier v Moreland Finance Corp (Vic) Pty Ltd (1989) 6 BPR [97462]
Custom Credit Corporation Ltd v Lupi [1992] 1 VR 99
Fast Fix Loans Pty Ltd v Samardzic [2011] NSWCA 260; (2011) 15 BPR 29,445
Forrest v Australian Securities and Investments Commission [2012] HCA 39; (2012) 247 CLR 486
Fox v Percy [2003] HCA 22; (2003) 214 CLR 118
GEL Custodians Pty Ltd v Gibson [2016] WASC 318
Joyce v Anderson [2020] WASCA 48; (2020) 91 MVR 334
Kowalczuk v Accom Finance Pty Ltd [2008] NSWCA 343; (2008) 77 NSWLR 205
Lee v Lee [2019] HCA 28; (2019) 266 CLR 129
Lightfoot v Rockingham Wild Encounters Pty Ltd [2018] WASCA 205
Micarone v Perpetual Trustees Australia Ltd (1999) 75 SASR 1
Minister for Immigration and Border Protection v SZVFW [2018] HCA 30; (2018) 264 CLR 541
Minister for Immigration v SZVFW [2018] HCA 30; (2018) 264 CLR 541
Paciocco v Australia and New Zealand Banking Group Ltd [2014] FCA 35; (2014) 309 ALR 249
Paciocco v Australia and New Zealand Banking Group Ltd [2015] FCAFC 50; (2015) 236 FCR 199
Paciocco v Australia and New Zealand Banking Group Ltd [2016] HCA 28; (2015) 258 CLR 525
Permanent Custodians Ltd v Shannon [No 2] [2018] WASC 295
Permanent Mortgages Pty Ltd v Vandenbergh [2010] WASC 10; (2010) 41 WAR 353
Perpetual Trustee Company Ltd v Burniston [No 2] [2012] WASC 383; (2012) 271 FLR 122
Perpetual Trustee Company Ltd v Khoshaba [2006] NSWCA 41; (2005) 14 BPR 26,639
Riz v Perpetual Trustee Australia Ltd [2007] NSWSC 1153; (2008) NSW Conv R 56–198
Robinson Helicopter Co Inc v McDermott [2016] HCA 22; (2016) 90 ALJR 679
Serventy v Commonwealth Bank of Australia [No 2] [2016] WASCA 223
St George Bank Ltd v Trimarchi [2004] NSWCA 120
Thompson v Byrne [1999] HCA 16; (1999) 196 CLR 141
Tonto Home Loans Australia Pty Ltd v Tavares [2011] NSWCA 389; (2011) 15 BPR 29,699
Warren v Coombes [1979] HCA 9; (1979) 142 CLR 531
West v AGC (Advances) Ltd (1986) 5 NSWLR 610
Contents
Quinlan CJ & Tottle J
Introduction
Section 76 of the National Credit Code
Background Facts
The ARMS III Securitisation Program
The appellants' financial circumstances prior to the Loan
The appellants approach Mr Lock and Yes Home Loans
Mr Lock advises Elders Real Estate that the Loan had been approved
Mr Lock obtains lenders mortgage insurance approval
Mr Lock forwards a mortgage purchase application to AFIG
AFIG approves the Loan and the Mortgage
The appellants sign the Loan Agreement and the Mortgage
Settlement and the advance of funds pursuant to the Loan Agreement
The appellants default under the Loan Agreement and the Mortgage
The Primary Reasons
The claims other than the claim under s 76 of the National Credit Code
The claim under s 76 of the National Credit Code
Grounds of Appeal
General observations on the grounds of appeal
Applicable Principles under s 76 of the National Credit Code
Is there an obligation to assess the viability of a loan?
The relevance of a lender's business structure
Tonto Home Loans
Contracting out – s 169 of the Consumer Credit (Western Australia) Code
Application of s 76 of the National Credit Code in the present case
The information provided by Yes Home Loans to AFIG
The disingenuous finding
The issue of agency
The normative evaluation in of all the circumstances in the present case
Conclusion – the Loan Agreement and the Mortgage were 'unjust'
Relief
Orders
Vaughan JA
Introduction
The challenges to the primary judge's factual findings
Section 76 of the National Credit Code: the applicable principles
An 'unjust' credit contract for the purposes of s 76
General considerations
Section 76(2)(l): reasonable inquiry as to the debtor's capacity to pay
The relevance of the credit provider's business structure
The difficulty in extracting general principles of law from the previous authorities
The three-step approach to the application of s 76
Appellate review of a finding pursuant to s 76
Evaluation: were the Loan Agreement and the Mortgage unjust?
Circumstances against the Loan Agreement and the Mortgage being 'unjust'
Neutral circumstances
Circumstances in favour of the Loan Agreement and the Mortgage being 'unjust'
Conclusion: the Loan Agreement and the Mortgage were 'unjust'
Conclusion and orders
QUINLAN CJ & TOTTLE J:
Introduction
This appeal concerns a long-running dispute between Anita and Christopher Shannon (the appellants) and the mortgagee of their home in Baker's Hill, Western Australia (the property). The current registered proprietor of the mortgage is Permanent Custodians Ltd (the first respondent). The original mortgagee was the second respondent, GEL Custodians Pty Ltd (GEL Custodians).
Mr and Mrs Shannon purchased the property in 2006 for the sum of $565,000. Approximately $132,000 of the purchase price was provided by a loan from Mr Shannon's mother. The balance of the purchase price was paid from a loan of $452,000 (the Loan) pursuant to a loan agreement with GEL Custodians (the Loan Agreement). The appellants granted GEL Custodians a mortgage over the property as security for the repayment of the Loan (the Mortgage).
GEL Custodians acted as the trustee and lender of record and mortgagee in respect of loans made under the ARMS III securitisation program. The third respondent, Australian Mortgage Securities Ltd (AMS), had overall responsibility for the originating and servicing of loans under the program. AMS appointed the fourth respondent, AFIG Wholesale Pty Ltd (AFIG), as its agent to exercise all of its powers, rights and functions.
Another company, since deregistered, Yes Home Loans Pty Ltd (Yes Home Loans), was a 'Correspondent' under the ARMS III Program pursuant to a Correspondent Deed and carried out functions which included originating and managing mortgages under the program. As will be seen, the role of Yes Home Loans and Mr David Lock, its South Australian manager, loom large in this litigation.
Mr and Mrs Shannon ultimately defaulted under the Loan Agreement and, in 2013, GEL Custodians commenced the primary proceedings, inter alia, to recover the sum then owing under the Loan Agreement, being $581,042.18 (with interest from 4 February 2013 at the rate of 8.27% per annum) and possession of the property.
Mr and Mrs Shannon denied GEL Custodians' claim and brought a counterclaim against a number of parties, including the respondents to this appeal.[1] In October 2016 the first respondent was substituted for GEL Custodians as plaintiff in the action, it having acquired the rights, and assumed the obligations, under the Loan Agreement.[2]
[1] The fifth respondent (the Registrar of Titles) did not participate in the appeal. The remaining respondents were jointly represented in the appeal and, unless otherwise stated, are referred to in these reasons as 'the respondents'.
[2] The first respondent undertook that it would not rely upon any indefeasibility of title to defeat any interest of Mr and Mrs Shannon (see GEL Custodians Pty Ltd v Gibson [2016] WASC 318 [9] (Allanson J)). Counsel for the respondents confirmed the currency of that undertaking in the appeal, submitting that the relief sought in the appeal, if allowed, 'would take effect no matter who currently holds the rights' (Appeal ts 162).
Following a trial in late 2017, Le Miere J rejected the appellants' defence and counterclaim.[3] On 21 September 2018 his Honour ordered that Mr and Mrs Shannon pay the outstanding debt under the Loan Agreement, then being $1,386,920.87 and deliver up vacant possession of the property within 42 days. The judgment sum has continued to accrue interest at the rate of 8.27% per annum since 22 September 2018.
[3] Permanent Custodians Ltd v Shannon [No 2] [2018] WASC 295 (Primary reasons).
The appellants appeal from the learned trial judge's decision.
Mr and Mrs Shannon were unrepresented in the appeal. They were also unrepresented for the lion's share of the proceedings at first instance, up until June 2017, when they engaged solicitors. They were represented at the trial.
The litigation, and the dispute with the respondents generally, have taken their toll on the appellants, particularly Mr Shannon who could at times be belligerent and intemperate in his interactions with the Court. This is not intended as a criticism of Mr Shannon, who clearly feels a genuine sense of grievance at the predicament in which he and Mrs Shannon have found themselves. That sense of grievance, and the generally acrimonious relationship between the appellants and the respondents, nevertheless may serve to explain some of the complexities of these proceedings and the sometimes distracting issues that have arisen throughout its long history.
The submissions on behalf of the appellants at the hearing of the appeal were largely presented by Mrs Shannon. Mrs Shannon presented the appellants' case in a thoughtful and considered way. Indeed, the resolution of the appeal was greatly assisted by the focus that Mrs Shannon brought to bear on the real issues in the appeal. The Court is also indebted to senior counsel for the respondents, Mr Cobby SC, who provided considerable assistance in navigating the issues that arose in the proceedings.
In that regard, as we shall return to later, the issues in the appeal were largely confined to the question as to whether the learned trial judge ought to have reopened the Loan Agreement and the Mortgage pursuant to s 76 of the National Credit Code (or the Code), on the ground that the Loan Agreement and the Mortgage were 'unjust' within the meaning of that section.
Section 76 of the National Credit Code
The National Credit Code has effect as a law of the Commonwealth.
Section 76 provides:
76Court may reopen unjust transactions
Power to reopen unjust transactions
(1)The court may, if satisfied on the application of a debtor, mortgagor or guarantor that, in the circumstances relating to the relevant credit contract, mortgage or guarantee at the time it was entered into or changed (whether or not by agreement), the contract, mortgage or guarantee or change was unjust, reopen the transaction that gave rise to the contract, mortgage or guarantee or change.
Matters to be considered by court
(2)In determining whether a term of a particular credit contract, mortgage or guarantee is unjust in the circumstances relating to it at the time it was entered into or changed, the court is to have regard to the public interest and to all the circumstances of the case and may have regard to the following:
(a)the consequences of compliance, or noncompliance, with all or any of the provisions of the contract, mortgage or guarantee;
(b)the relative bargaining power of the parties;
(c)whether or not, at the time the contract, mortgage or guarantee was entered into or changed, its provisions were the subject of negotiation;
(d)whether or not it was reasonably practicable for the applicant to negotiate for the alteration of, or to reject, any of the provisions of the contract, mortgage or guarantee or the change;
(e)whether or not any of the provisions of the contract, mortgage or guarantee impose conditions that are unreasonably difficult to comply with, or not reasonably necessary for the protection of the legitimate interests of a party to the contract, mortgage or guarantee;
(f)whether or not the debtor, mortgagor or guarantor, or a person who represented the debtor, mortgagor or guarantor, was reasonably able to protect the interests of the debtor, mortgagor or guarantor because of his or her age or physical or mental condition;
(g)the form of the contract, mortgage or guarantee and the intelligibility of the language in which it is expressed;
(h)whether or not, and if so when, independent legal or other expert advice was obtained by the debtor, mortgagor or guarantor;
(i)the extent to which the provisions of the contract, mortgage or guarantee or change and their legal and practical effect were accurately explained to the debtor, mortgagor or guarantor and whether or not the debtor, mortgagor or guarantor understood those provisions and their effect;
(j)whether the credit provider or any other person exerted or used unfair pressure, undue influence or unfair tactics on the debtor, mortgagor or guarantor and, if so, the nature and extent of that unfair pressure, undue influence or unfair tactics;
(k)whether the credit provider took measures to ensure that the debtor, mortgagor or guarantor understood the nature and implications of the transaction and, if so, the adequacy of those measures;
(l)whether at the time the contract, mortgage or guarantee was entered into or changed, the credit provider knew, or could have ascertained by reasonable inquiry at the time, that the debtor could not pay in accordance with its terms or not without substantial hardship;
(m)whether the terms of the transaction or the conduct of the credit provider is justified in the light of the risks undertaken by the credit provider;
(n)for a mortgage—any relevant purported provision of the mortgage that is void under section 50;
(o)the terms of other comparable transactions involving other credit providers and, if the injustice is alleged to result from excessive interest charges, the annual percentage rate or rates payable in comparable cases;
(p)any other relevant factor.
Representing debtor, mortgagor or guarantor
(3) For the purposes of paragraph (2)(f), a person is taken to have represented a debtor, mortgagor or guarantor if the person represented the debtor, mortgagor or guarantor, or assisted the debtor, mortgagor or guarantor to a significant degree, in the negotiations process prior to, or at, the time the credit contract, mortgage or guarantee was entered into or changed.
Unforeseen circumstances
(4)In determining whether a credit contract, mortgage or guarantee is unjust, the court is not to have regard to any injustice arising from circumstances that were not reasonably foreseeable when the contract, mortgage or guarantee was entered into or changed.
Conduct
(5)In determining whether to grant relief in respect of a credit contract, mortgage or guarantee that it finds to be unjust, the court may have regard to the conduct of the parties to the proceedings in relation to the contract, mortgage or guarantee since it was entered into or changed.
Application
(6)This section does not apply:
(a)to a matter or thing in relation to which an application may be made under subsection 78(1); or
(b)to a change to a contract under this Division.
(7)This section does apply in relation to a mortgage, and a mortgagor may make an application under this section, even though all or part of the mortgage is void under subsection 50(3).
The National Credit Code was enacted by the National Consumer Credit Protection Act 2009 (Cth).[4] The National Credit Code largely replicates the Uniform Consumer Credit Code that had been applied in States and Territories since 1996, including, in this State, the Consumer Credit (Western Australia) Code, which was enacted pursuant to the Consumer Credit (Western Australia) Act 1996 (WA).
[4] National Consumer Credit Protection Act 2009 (Cth), s 3.
The Explanatory Memorandum for the National Consumer Credit Protection Bill 2009 (Cth) makes clear that:[5]
As the Code largely replicates the UCCC, the objectives of the regime remain the same as those when the UCCC was first enacted. Namely, to ensure strong consumer protection through 'truth in lending', while recognising that competition and product innovation must be enhanced and encouraged by the development of non prescriptive flexible laws.
[5] National Consumer Credit Protection Bill 2009, Explanatory Memorandum [8.3].
Consistent with the National Credit Code's replication of the Uniform Consumer Credit Code, ss 76(1) to 76(5) of the Code are in relevantly identical terms to s 70 of the former Consumer Credit (Western Australia) Code.
We will return to s 76 of the National Credit Code later.
First, it is necessary to set out the facts relevant to the appeal and to identify some of the other issues at trial.
Background Facts
The following facts are taken from the factual findings made by the learned trial judge, supplemented where necessary from the evidence at trial. We have not included any factual matter alleged, or evidence given, by the appellants at trial that was rejected by his Honour.[6] Accordingly, the facts that follow may be regarded as primary facts for the purposes of the appeal.
The ARMS III Securitisation Program
[6] In that regard we have not included reference to the appellants' claim, which was rejected by the learned trial judge that Mr Lock had represented to them (and that they believed) that Yes Home Loans was the actual lender (see [116] and [122] below).
As noted above, GEL Custodians acted as the trustee and lender of record and mortgagee in respect of loans made under the ARMS III securitisation program. The ARMS III program succeeded the ARMS II program in May 2006,[7] at around the time that the appellants entered into the Loan Agreement and the Mortgage.
[7] Primary reasons [21].
Being securitisation programs, ARMS II and ARMS III operated through trusts, which were held for the benefit of unit holders. The money invested by the unit holders (by purchasing units in the trust) was available for investment under the program on registered first home mortgages.[8] The trust in each case was governed by a Master Trust and Security Trust Deed. The original trustee was Permanent Custodians Ltd, although the original Master Trust and Security Trust Deed was not in evidence.
[8] Primary reasons [23].
The ARMS III Program was based on the Master Trust and Security Trust Deed dated 5 May 2006 (the 2006 Trust Deed).[9] The 2006 Deed was between GEL Custodians, as trustee, and AMS, the initial trust manager. Under the terms of the 2006 Trust Deed, it was AMS who could create the trust.[10]
[9] Exhibit 10.
[10] Exhibit 10, cl 2.1 (Trial Bundle page 175).
Under both the ARMS II program and the ARMS III program, the trustee and AMS also entered into a Master Originating and Servicing Agreement (MOSA). The MOSA for the ARMS II program was dated 7 March 1995 (the 1995 MOSA)[11] and the MOSA for the ARMS III program dated 6 May 2006 (the 2006 MOSA).[12]
[11] Primary reasons [22], Exhibit 1.
[12] Exhibit 11 (GAB 163).
The 'Master Servicer' under the MOSA, in each case, was AMS. The Master Servicer was responsible for the origination and management of loans and mortgages as investments of the trust.
As part of its obligations to the trustee under the MOSA, the Master Servicer (i.e. AMS) made certain representations and gave certain warranties to the trustee. For example, clause 12.1 of the 2006 MOSA provided:[13]
[13] Exhibit 11 (GAB 178-179). The 1995 MOSA was to the same effect (Exhibit 1).
12.Representations and warranties
12.1Regarding Mortgages
The Master Servicer represents and warrants to the Trustee that except as disclosed to the Trustee in writing, and approved or waived by the Trustee on or prior to the settlement or acquisition of a Mortgage, the following matters will be true and correct in all material respects in relation to that Mortgage:
…
(c)(Mortgage Documents): each Mortgage Document relating to that Mortgage is and will at all times be, in all material respects, in the form required by the Agreed Procedures, and the Master Servicer will not agree to any amendment, variation or waiver of any Mortgage Document except as specifically permitted by and in accordance with this Agreement or the Agreed Procedures;
(d)(Property Insurance): the Property is insured in accordance with the requirements of the Mortgage;
(e)(Mortgage Insurance): the Mortgage is covered by a Mortgage Insurance Policy;
(f)(Loan Application): the Mortgagor's Loan Application is substantially in the form required by the Agreed Procedures and has been investigated by the Master Servicer in accordance with the Agreed Procedures;
(g)(Consumer Credit Code): in the case of a Mortgage entered into before the Consumer Credit Code, none of the Mortgage Documents relating to that Mortgage is a Regulated Mortgage (as defined in Section 5 of the Credit Act 1984 (NSW) or the corresponding legislation of any other Australian Jurisdiction);
(h)(Adverse Circumstances): the Master Servicer is not aware of any circumstances relating to the Mortgage, the Property or any Obligor which could reasonably be expected to cause a prudent investor to:
(i)regard the Mortgage as an unacceptable investment;
(ii)expect the Mortgagor to default under the Mortgage; or
(iii)diminish the value or marketability of the Property from that stated in the Valuation;
(i)(Agreed Procedures): the Agreed Procedures have been fully complied with in relation to that Mortgage; and
…
The MOSA also provided that the Master Servicer could delegate its powers under the MOSA to a delegate. AMS, as Master Servicer, appointed AFIG as its agent to exercise all of its powers, rights and functions under the MOSA.[14]
[14] Primary reasons [24]. The respondents, at trial, were unable to locate any document directly evidencing the relationship between AMS and AFIG, although it appears uncontroversial that the relationship of agency did exist (ts 260).
AMS and AFIG in turn appointed 'correspondents' to carry out functions in relation to the origination and management of loans under the ARMS II and ARMS III programs. Yes Home Loans was one such correspondent, it having entered into a Correspondent Deed dated 1 September 1999 (the Correspondent Deed). It was common ground at trial that Yes Home Loans continued as a Correspondent under the 1999 Correspondent Deed.[15]
[15] Primary reasons [26].
The Correspondent Deed provided that the status of the Correspondent (Yes Home Loans) was that of independent contractor. Clause 3.1 provided:[16]
[16] Exhibit 8 (GAB 139).
3.STATUS OF CORRESPONDENT
3.1Independent Contractor
Except for the express delegation to the Correspondent of the exercise of the Powers contained in this Deed, the Correspondent agrees that in performing its obligations under this Deed:
(a)it is an independent contractor and is not the agent, partner or employee of AMS or the Mortgagee;
(b)it must not hold itself out as, or engage in conduct which would lead others to believe that it is the Mortgagee under any Mortgage or the agent, partner or employee of AMS or any Mortgagee;
(c)it will be solely responsible for the acts or omissions of its employees or agents, or of independent contractors, advisers or Representatives engaged by it in the performance of its obligations under this Deed; and
(d)it must not (except as permitted by clause 3.2) issue any promotional or advertising material which includes the name of AMS, any Mortgagee or the provider of any Enhancement without the prior written consent of AMS, that Mortgagee or that Enhancement provider (as the case may be).
The Correspondent Deed goes onto provide that the Correspondent may from time to time give to AMS mortgage proposals. Each mortgage proposal was required to be in the form and in accordance with the Operations Manual (as defined in the Correspondent Deed) and any relevant mortgage insurance policy.[17] The Correspondent Deed included the following provisions in relation to the provision of information to AMS and AMS' discretion whether to accept a mortgage proposal:[18]
4.2Correspondent to Provide Information
The Correspondent must give AMS all information requested by AMS in relation to a particular Mortgage Proposal which is reasonably required by AMS to give consideration to and process in accordance with its usual practices and procedures the Mortgage Proposal.
4.3Acceptance of Mortgage Proposal
AMS may accept (but has no obligation to accept) a Mortgage Proposal. Any such acceptance must be in the form, contain the information, be accompanied by the documents specified in, and otherwise be made in accordance with the Operations Manual.
[17] Primary reasons [27].
[18] Exhibit 8 (GAB 140).
The Correspondent Deed also provided for certain representations and warranties by the Correspondent to AMS, including in relation to the Operations Manual. Clause 12.1 provided:[19]
[19] Exhibit 8 (GAB 149-150).
12.1Regarding Mortgages
The Correspondent represents and warrants to AMS that except as disclosed to AMS in writing, and approved or waived by AMS on or prior to the settlement or acquisition of a Mortgage, the following matters will be true and correct in all material respects in relation to that Mortgage:
…
(d)(Mortgage Documents):
(i)each Mortgage Document relating to that Mortgage is and will at all times be in the form required by the Operations Manual;
(ii)the Correspondent will not agree to any amendment, variation or waiver of any Mortgage Document except as specifically permitted by and in accordance with:
A. this Deed or the Operations Manual; or
B. the written approval of AMS; and
(iii)all blanks and variables in the form of each relevant Mortgage Document have been completed in accordance with the Operations Manual and the manner of such completion is consistent with relevant Loan Application, Mortgage Proposal and AMS' Solicitors' instructions pack and each relevant Mortgage Document appears to have been duly executed;
(e)(Property Insurance): the Property is insured in accordance with the requirements of the Mortgage;
(f)(Mortgage Insurance):
(i)the Mortgage is covered by a Mortgage Insurance Policy with a mortgage insurer approved by AMS and all of the requirements of the relevant mortgage insurer; the Operations Manual and the relevant Mortgage Insurance Policy with respect to the application for and taking out of that Mortgage Insurance Policy have been complied with; and
(ii)all information provided to the insurer under the relevant Mortgage Insurance Policy was, to the best of the knowledge of the Correspondent true and correct in all material respects, when provided, was not misleading (including by omission) and was verified by the Correspondent in accordance with the procedures set out in the Operations Manual;
(g)(Loan Application): the Mortgagor's Loan Application has been fully investigated by the Correspondent in accordance with the Operations Manual, and the Correspondent is satisfied that all statements and information contained in it are correct in all respects;
(h)(Origination): the Mortgage (and each Loan secured by that Mortgage) has been assessed and originated in accordance with the Operations Manual;
(i)(Credit Act): in the case of a Mortgage entered into in any State or Territory of the Commonwealth of Australia before the coming into force in that State or Territory of the Consumer Credit Code, none of the Mortgage Documents relating to that Mortgage is a Regulated Mortgage, as defined in Section 5 of the Credit Act 1984 (NSW) or the corresponding legislation of any other Australian Jurisdiction;
(j)(Consumer Credit Code): in the case of any Mortgage which is regulated by the Consumer Credit Code, all of the requirements of the Consumer Credit Code with respect to the entering into of the relevant Mortgage Documents were complied with, except to the extent that such non‑compliance was caused by the act or omission of AMS, any adviser or consultant to AMS, or any person referred to in clause 6.4;
(k)(Adverse Circumstances): the Correspondent is not aware of any circumstances relating to the Mortgage, the Property, the Mortgagor or any Guarantor which could reasonably be expected to cause a prudent investor to:
(i)regard the Mortgage as an unacceptable investment;
(ii)expect the Mortgagor to default under the Mortgage; or
(iii)diminish the value or marketability of the Property from that stated in the Valuation;
…
It will be apparent from these provisions that the Operations Manual was a key document in the relationship between AMS, AFIG and the correspondents. A number of documents, each headed 'AFIG Wholesale Operations Manual', dealing with specific issues were tendered by consent at trial.[20] It was agreed at trial that the 'AFIG Wholesale Operations Manual' was the relevant manual applicable at the time of the Loan and the Mortgage.[21]
[20] Exhibits 2, 3, 4, 5, 6, and 7; Ts 544.
[21] Ts 260-261.
The Operations Manual described the role of the Correspondent (in Section 2) as follows:[22]
[22] Exhibit 2 (GAB 86).
2.1The Role of the Correspondent
AFIG Wholesale is committed to quality in all aspects of its business operations and looks to its relationship with its Correspondent to reflect this philosophy.
The relationship between AFIG Wholesale and a Correspondent is governed by the Correspondent Deed executed between the Correspondent, AFIG Wholesale and AMS, and this Operations Manual.
Correspondents have two distinct roles in the ARMS II Program:
· They originate mortgage loans in accordance with the approved guidelines, as outlined in this Operations Manual and the Correspondent Deed; and
· They manage those mortgages through to maturity or discharge.
It is the Correspondent's role to manage its relationship with the approved solicitors.
As part of its function of originating loans, a Correspondent was required to evaluate the credit worthiness of borrowers, including inquiries in relation to a borrower's income. Sections 4.5 and 4.6 provided:[23]
[23] Exhibit 2 (GAB 93).
4.5Credit Analysis
The Correspondent is to evaluate the credit worthiness of the borrower in conjunction with the guidelines outlined in this manual and any criteria of the Mortgage Insurer.
A borrower should have a clear credit history and a stable employment record.
Verification of the loan application must include, but not limited to:
· Signed and dated asset and liability statements of all individual borrowers and guarantors plus balance sheet and profit and loss accounts for all company borrowers;
· If a Fastdoc product is being applied for, self-employed applicants may choose to provide an income/affordability declaration in lieu of income verification;
· For refinance loans, evidence of satisfactory repayment history by way of loan, bank account or internet statements (or payslips, if the existing loan is paid by salary deduction) for at least the last 6 months, confirming the balance, punctual payments and satisfactory conduct;
· Credit checks must be undertaken on all potential borrower and guarantors. Correspondents must include an inquiry to a recognised credit bureau or reference association;
· Evidence of borrower's equity; and
· Execution of the Privacy Act Form.
4.6Borrower's Income
Correspondents must not submit loan applications to AFIG Wholesale for approval unless the Correspondent is completely satisfied, having made all reasonable enquiries of the borrower, that the borrower will be able to meet its obligations under the loan contract in accordance with its terms without substantial hardship.
The Code empowers the Courts to reopen transactions giving rise to a contract, mortgage or guarantee if it is satisfied that, in the circumstances when it was entered into or changed, it was unjust. Whether or not the loan is governed by the Code, Correspondents are required to satisfy themselves of the borrower's ability to afford the loan.
See 4.6.2 for verification of a borrower's income. The most recent financial data obtained must not be more than six months old.
Capacity of borrower to fund loan payments from rental income should be verified by reference to a current tenancy agreement and schedule of property expenses and Rental set out in the Valuations.
Correspondents must, in the course of verifying a borrower's income, comply with the collection, use and disclosure requirements of the Privacy Act (see generally 5.6).
Section 6 of the Operations Manual made particular provision for the Loan Submission Process to be followed by a Correspondent. It prescribed a seven-step process. Relevantly, that process included, as Step 2, the requirement to evaluate the credit worthiness of the borrower in accordance with Section 4.
Step 4 of the Loan Submission Process required the Correspondent to obtain lenders mortgage insurance:[24]
Step 4Submit to Mortgage Insurer
Subject to the Correspondent being satisfied that the loan conforms to the qualifying mortgage criteria outlined in part 4, the Correspondent should complete an application for lender's mortgage insurance.
The application, supporting documentation and valuation should be forwarded to the approved mortgage insurer.
The mortgage insurance approval should clearly detail the relevant master policy number, loan details, (including loan term and product type) and should not contain any special conditions (except reference to cross collateralisation (where applicable).
[24] Exhibit 2 (GAB 102).
Step 5 required the Correspondent to forward to the borrower a loan proposal. Step 5 provides:[25]
Step 5Forward Loan Proposal to Borrower
After obtaining mortgage insurance approval, the Correspondent is to forward to the borrower a loan proposal for the appropriate product type. …
Please note that the loan proposal is indicative only and does not oblige the trustee to make the loan available. It is a non-binding statement of intention.
[25] Exhibit 2 (GAB 102).
As this final paragraph makes clear, up until Step 6 in the process no information has yet been provided to the trustee, AMS or AFIG and, at that point, a final lending decision is yet to be made.
Step 6 is the critical point at which the application is submitted to AMS or AFIG. The application is described as the mortgage purchase application (or MPA). Step 6 provides:[26]
[26] Exhibit 2 (GAB 102).
Step 6Mortgage Purchase Application
When the loan proposal has been issued, the Correspondent is to forward an MPA to AFIG Wholesale. The following documents are to be attached to the MPA:
· Signed MPA Declaration;
· Schedules 1 and 2 (fully completed);
· NSR worksheet and/or declaration of income/affordability;
· Loan proposal letter;
· LMI proposal forms and approval;
· Valuation;
· The service nomination form and/or the loan purpose declaration (as applicable) (Appendix 9);
· Linkpoint Card Applications;
· MasterCard/Cheque book application(s) where the customer has applied for a MasterCard and/or Cheque book); and
· FTRA document with supporting identification documents (Line of Credit applications where the applicant has applied for a MasterCard and/or Cheque book).
If the total AFIG Wholesale loans to this borrower exceed or will exceed $500,000 attach also:
· Copy of application (including assets & liabilities statement);
· Evidence of income (including financial statements (if a company);
· Correspondent loan summary;
· Satisfactory evidence (refer Section 4.5) of loan conduct for last 6 months (for all loans being refinanced); and
· Other relevant background and supporting documentation (see section 4.2).
The MPA will be the source document for input to the AFIG Wholesale computer system and preparation of the solicitor's instructions, therefore the information content is important and needs to be full, complete and accurate.
The 'service nomination form and/or the loan purpose declaration' referred to in Step 6 is a reference to the service nomination form for notices and the declaration as to the intended purpose of the loan (which was, in turn, relevant to the applicability of the Consumer Credit Code (see clause 5.2)).
It will be apparent from this summary of the relevant documentation that, in the case of a loan that does not exceed $500,000, the Correspondent is not required to provide AMS or AFIG with either the loan application, the borrower's assets and liabilities statement or any evidence of the borrower's income.
Turning then to the particular Loan to the appellants.
The appellants' financial circumstances prior to the Loan
Prior to 2005 the appellants were living in Sydney. While they were in Sydney Mr Shannon started an online marketing business called E‑News Direct.[27] The appellants operated the business as a partnership.
[27] Primary reasons [28].
The appellants moved to Western Australia in early 2005. They registered the business name E-News Direct in Western Australia in April 2005.
At that time the appellants' only income was the profit earned from their partnership in operating the E-News Direct business. It was not, with respect to the appellants, a particularly profitable enterprise.
For the year ended 30 June 2003, according to the partnership tax return for the following year, the profit of E-News Direct available for distribution was $12,609, which was distributed to Mr and Mrs Shannon in the sum of $6,304 and $6,305 respectively.[28]
[28] Exhibit 353 (Trial Bundle page 2329).
For the year ended 30 June 2004, the partnership tax return for the year shows that the profit available for distribution was $62,446, which was divided equally between the appellants (i.e. $31,223 each).[29]
[29] Exhibit 353 (Trial Bundle page 2329; Primary reasons [29].
For the year ended 30 June 2005, the partnership tax return for the year shows that the the profit available for distribution was $24,213, which was distributed to Mr and Mrs Shannon in the sum of $12,107 and $12,106 respectively.[30]
[30] Exhibit 356 (Trial Bundle page 2361).
For the year ended 30 June 2006 (the year in which the appellants entered into the Loan Agreement), the partnership tax return for the year shows that the profit available for distribution was $88,155, which was divided equally (i.e. approximately $44,078 each).[31]
[31] Exhibit 359 (Trial Bundle page 2388); see also Exhibit 357 (Trial Bundle page 2366) and Exhibit 358 (Trial Bundle page 2373).
The following year, the year ended 30 June 2007, the partnership tax return for the year shows that the profit available for distribution had fallen to $7,292.[32]
[32] Exhibit 362 (Trial Bundle page 2417).
On the basis of the evidence as to their income the learned trial judge found, as a matter of fact, that the appellants could not afford the Loan and could not make the loan repayments without substantial hardship.[33] There is no challenge to that finding of fact in the appeal. It is clearly correct. The monthly repayments under the loan were $2,595.23 ($31,143 per year).[34] The appellants' average combined pre-tax income for the three years prior to the date of the loan ($33,089) was barely higher than the yearly repayments. Even including the year ended 30 June 2006, which returned a reasonable profit, the average yearly income from the partnership would have left little for living expenses after the mortgage repayments.
[33] Primary reasons, [30], [239].
[34] Primary reasons, [30].
The appellants nevertheless thought that they could afford mortgage repayments between $2,000 and $2,500 per month, apparently based upon the amount of rent that they had been paying in Sydney. The appellants were clearly wrong about this and the learned trial judge found that they did not have reasonable grounds for their belief that they could afford the Loan. It is apparent, however, that his Honour accepted that the appellants genuinely held the belief that they professed.[35]
The appellants approach Mr Lock and Yes Home Loans
[35] Primary reasons, [32].
Following their move to Western Australia, the appellants began to look for a house to buy.
In March 2006, the appellants identified the property as a potential purchase. The property was on the market for $579,000.[36]
[36] Exhibit 501, [7] (GAB 3).
On 23 March 2006 the appellants took Mr Shannon's mother, Bernice Shannon (Mrs Shannon Snr), to look at the property. Mrs Shannon Snr initially suggested that she purchase the property. Between 23 March 2006 and 19 April 2006 the appellants and Mrs Shannon Snr discussed the option of Mrs Shannon Snr buying the property. Ultimately the appellants decided to see if they could get finance to purchase the property themselves.[37]
[37] Primary reasons [33].
The appellants decided to approach Mr Lock at Yes Home Loans.
It may, at this point, be observed that Mr Lock had been a friend of Mr Shannon. They met in Sydney in 1999. Mr Lock had moved to Adelaide in 2004 to work with Yes Home Loans, but he and Mr Shannon had remained friends.[38] It was because of their past friendship that the appellants approached Mr Lock and Yes Home Loans for the Loan.
[38] Exhibit 503, [13] (GAB 48).
The friendship between Mr Lock and Mr Shannon became a matter of contention at trial, principally because the appellants (at times when they had been representing themselves) did not disclose the nature of their relationship with Mr Lock in many affidavits that had been sworn prior to trial. The learned trial judge concluded their failure to do so adversely affected their credibility in relation to significant issues at the trial. That conclusion in turn led his Honour to reject certain parts of their evidence (a matter to which we shall return later).
One thing, however, should be made clear in relation to the relationship between Mr Shannon and Mr Lock. It is this: as will become apparent, the learned trial judge found that, in multiple respects, Mr Lock engaged in dishonest and fraudulent conduct in arranging the Loan Agreement and the Mortgage. It was not suggested at trial, and there is no finding of the learned trial judge to the effect, that either Mr or Mrs Shannon were in any way involved in, or aware of, Mr Lock's dishonest and fraudulent conduct.
Accordingly, while there are certain findings of fact adverse to the appellants that, on appeal, they are unable to disturb, there is no finding that the appellants were involved in, or aware of, Mr Lock's dishonest and fraudulent conduct. The appellants are innocent of that conduct.
While it was not clear precisely when the appellants approached Yes Home Loans in relation to the Loan, it was prior to 23 March 2006, as on that day Mr Shannon sent an email to Mr Lock requesting a loan application form.[39]
[39] Primary reasons [34]; Exhibit 32.
Mr Lock provided a blank loan application document that same day.[40]
[40] Primary reasons [34]; Exhibit 33 (GAB 233) and Exhibit 34.
The appellants partially completed the loan application form and returned it to Mr Lock by facsimile.[41] The form stated that Mr Shannon and Mrs Shannon (by her previous surname, Gibson) were employed by E-News Direct as sales manager and production manager respectively. The appellants did not fill in any financial details, namely, their income, assets and liabilities. They signed and dated the form at various points with the date 19 April 2006.
[41] Primary reasons [35]. The learned trial judge refers to the appellants having emailed the form; it is apparent from the exhibit (Exhibit 37 (GAB 241)) that it was in fact sent by facsimile. The error is of no consequence.
A couple of additional points should be made in relation to the application form prepared by the appellants.
First, the personal details included in the form were accurate. That part of the form appears as follows:[42]
[42] Exhibit 37 (GAB 243). This image has been redacted to remove the appellants' unique personal identifiers (i.e. their dates of birth and driver's licence numbers).
Secondly, while the page of the loan application that made provision for financial details (assets, liabilities and income) had been left blank, that page was not signed by the appellants.[43]
[43] While the copy of the document which was tendered at trial (Exhibit 37 (GAB 241-250)) has initials at the bottom of each page, it is apparent that those initials were added later, when the document was annexed to an affidavit sworn by the appellants in March 2014.
Thirdly, the pages of the application that do contain the appellants' signatures (pages 6, 7, 8 and 9) are pro forma pages and otherwise contain no relevant information in relation to the loan application. Page 8 included a pro forma declaration as to the purpose of the loan (which was not completed) and a joint nomination form (which was completed).
On 24 April 2006, the appellants signed a contract to purchase the property by a contract for sale of land by offer and acceptance. It was signed by the vendor on the same day. The purchase price was $565,000. The contract was conditional upon finance approval being obtained before 22 May 2006 in an amount of 80% of the purchase price (that is, $452,000). The specified lender is Yes Home Loans. The appellants sent a copy of the contract for sale of land to Yes Home Loans.[44]
[44] Primary reasons [36].
From late April 2006 into early May 2006 there were various communications between the appellants and Mr Lock concerning a valuation report in respect of the property. Ultimately, on 11 May 2006, Yes Home Loans received a valuation report from Hegney Property Valuations, providing a valuation of $565,000. A copy of the valuation was provided to the appellants. Mr Shannon responded to Mr Lock, thanking Mr Lock for all his assistance in 'getting this deal financed' and expressing the appellants' appreciation.[45]
[45] Primary reasons [37]; Exhibit 58 (GAB 280-282).
On 18 May 2006, Mr Shannon sent an email to Mr Lock attaching a copy of a building report and stated that it should give Mr Lock 'some confidence that you have backed a good each way bet'. The email also stated:[46]
Also, our deadline for finance approval is Monday, (22/05/06). Could you, please, make sure the approval paperwork gets to the REA before close of business Monday, please?
…
Thanks for all your help. We're excited!~!~!
[46] Primary reasons [38]; Exhibit 60 (GAB 286).
On 22 May 2006 at 10.44 am Mr Shannon telephoned Mr Lock to make sure that Mr Lock sent the finance approval letter that day.[47]
Mr Lock advises Elders Real Estate that the Loan had been approved
[47] Primary reasons [39].
At this point in the narrative, Mr Lock engaged in a range of conduct that was fraudulent and dishonest.
First, on 22 May 2006 at 11.35 am (1.05 pm Australian Central Standard Time), Mr Lock sent a facsimile to Elders Real Estate, the vendor's agent under the contract for the sale of the property, advising it that the finance had been approved. The facsimile said:[48]
Please accept this memo as advice of the formal approval with regards to the aforementioned purchase.
We have approved $452,000 in the names of Christopher Shannon and Anita Gibson.
[48] Primary reasons [39]; Exhibit 63 (GAB 291).
This was false. Not only were Yes Home Loans not the relevant lender under the ARMS III program (and so unable to approve the Loan), at the time this advice was given to Elders Real Estate, Yes Home Loans had not arranged for lenders mortgage insurance (see Step 4 at [36] above), issued a loan proposal (see Step 5 at [37] above), or forwarded a mortgage purchase application to AFIG (see Step 6 at [39] above).
Shortly thereafter, at 12.30pm, Mr Lock advised Mr Shannon by email that an approval letter had been sent to Elders Real Estate.[49]
[49] Primary reasons [39]; Exhibit 62 (GAB 289).
Mrs Shannon also gave evidence at trial that she recalled Yes Home Loans contacting the appellants by telephone advising them that the loan had been approved.[50] While the learned trial judge did not refer to this evidence in the Primary reasons, it is consistent with the email to Mr Shannon.
Mr Lock obtains lenders mortgage insurance approval
[50] Exhibit 501, [45] (GAB 10); ts 432.
Three days later, on 25 May 2006, Mr Lock sent a facsimile to Genworth Financial Mortgage Insurance Pty Ltd (Genworth Financial) attaching an application for lenders mortgage insurance in respect of a loan of $452,000 to the appellants. The application included a copy of what was said to be a loan application from the appellants.
The personal details part of the form appears as follows:[51]
[51] Exhibit 68 (GAB 300). Again, redacted to remove the appellants' dates of birth and driver's licence numbers.
As will be readily apparent, this is not the page that was completed by the appellants (see [65] above). The information included in the form in relation to Mr Shannon's email address ([email protected]) and employer (Red Dirt Personnel Group) is false. The learned trial judge inferred that the page was completed by Mr Lock or someone at his direction.[52]
[52] Primary reasons [42].
The application form provided to Genworth Financial also included purported financial details of the appellants. It contained the following:[53]
[53] Exhibit 68 (GAB 301).
This was not completed by the appellants either and, as the learned trial judge found, was completed by Mr Lock or someone at his direction.
All of the information set out above in relation to Mr Shannon's employment (including the salary of $96,600) and all of the other financial information was, as his Honour also found, a complete fabrication.[54]
[54] Primary reasons [42].
The only parts of the loan application form which accurately reflected the form that the appellants had earlier provided to Yes Home Loans were the pages of the application containing the appellants' signatures (pages 6, 7, 8 and 9). As noted at [67] above, they were pro forma pages and otherwise contained no information in relation to the loan application. Indeed the copy of those pages were themselves altered in the copy provided to Genworth Financial.[55]
[55] The copy of the page 7 provided to Genworth Financial includes 'tick' marks in the Loan Purpose declaration that did not appear in the loan application form completed by the appellants.
While not referred to in the Primary reasons, it is also apparent from the evidence at trial that the fabrication of the loan application provided to Genworth Financial was compounded by the covering facsimile to Genworth Financial which stated (falsely):[56]
Chris is employed as the Operations Manager for Red Dirt Personnel; he has held this position for 13 months and has an annual salary of $96,600.00
Anita is responsible for home duties.
The clients have one credit card with Virgin with a limit of $3,000, they have no other liabilities.
The clients have saved $76,000 of their own funds, and they have recently inherited $110,000.00.
[56] Exhibit 68 (GAB 292).
That facsimile was personally signed by Mr Lock. At the end of the facsimile, in a handwritten addendum, it states:[57]
Please note*
Clients are Directors of E-News P/L, this company is not trading and has no liabilities.
[57] Exhibit 68 (GAB 293).
On 29 May 2006, Genworth Financial issued an acceptance advice to Yes Home Loans for lenders mortgage insurance in respect of the Loan for an amount of $452,000.[58]
[58] Exhibit 74 (GAB 318).
There is no evidence that the appellants had any knowledge of the fraudulent circumstances in which the lenders mortgage insurance was obtained. Indeed, it appears that the appellants only became aware of the fabricated loan application when the respondents' solicitors provided them with a copy of it by letter dated 21 September 2012.[59]
Mr Lock forwards a mortgage purchase application to AFIG
[59] Exhibit 154 (Trial Bundle page 1233); Exhibit 501, [147] (GAB 24); Exhibit 503, [106] (GAB 64).
On 31 May 2006, by facsimile, Yes Home Loans forwarded a mortgage purchase application to AFIG requesting that it accept purchase of a mortgage loan to the appellants of $452,000.[60]
[60] Primary reasons [44].
The mortgage purchase application itself was dated 30 May 2006 and signed by an authorised signatory at Yes Home Loans. The mortgage purchase application certified the following matters in relation to the mortgage:[61]
1.The information contained in this Mortgage Purchase Application and all attachments is correct.
2.Each Mortgage to be purchased complies with the criteria set out in the Operations Manual (as amended from time to time) except for registration, and upon registration, the mortgage loan will meet all criteria in the Operations Manual.
3.We are not aware, nor been able to ascertain by reasonable enquiry, of any reason or circumstance under which the Borrower might be unable to pay in accordance with the terms set out in the loan contract or not without substantial hardship.
4.We are not in default under the Approved Correspondent Deed and each mortgage loan is to be required by the Trustee pursuant to and in accordance with the Correspondent Deed.
[61] Primary reasons [44]; Exhibit 74 (GAB 308).
As the learned trial judge found, each of the matters certified by Yes Home Loans was false. The information contained in the application and in the attachments was not correct. Nor did the mortgage comply with the Operations Manual.[62]
[62] Primary reasons [46].
In particular, the attachments to the mortgage purchase application included a schedule signed by Mr Lock stating that a signed and completed application form and evidence of income were held on file and the employer had been telephoned by Yes Home Loans to verify income.[63] Another schedule stated that the appellants were not self-employed.[64] All of those statements were plainly false.
[63] Exhibit 74 (GAB 311).
[64] Exhibit 74 (GAB 309).
The attachments to the mortgage purchase application also included the acceptance advice issued by Genworth Financial referred to at [86] above.
Also included, on the front of the mortgage purchase application, was a checklist of matters to be attached to the MPA. While not referred to by the learned trial judge, this check list was, we infer, a standard part of the processes between Yes Home Loans and AFIG.
The checklist appears as follows:[65]
[65] Exhibit 74 (GAB 308).
As is apparent, this checklist closely mirrors the requirements set out in Step 6 of the Loan Submission Process in the Operations Manual (see [39] above). That is, it lists the documents that are required by the mortgage purchase application to be attached to the mortgage purchase application, including those additional documents that are to be attached if the loan exceeds $500,000.
The proposed loan in the present case did not exceed $500,000. Accordingly, in accordance with both the Operations Manual and the checklist, Yes Home Loans was not required to attach the application form and income evidence to the mortgage purchase application.
Even still, the attachments to the mortgage purchase application in the present case were incomplete and did not include each of the matters required by the Operations Manual. Both the Operations Manual and the checklist, for example, require the inclusion of the Loan Proposal letter and signed acceptance (item 4 on the checklist) and the service nomination form or loan purpose declaration (item 5).[66] Neither a Loan Proposal letter and signed acceptance nor a service nomination form was attached to the mortgage purchase application.[67] Indeed, there is no evidence that a Loan Proposal letter and signed acceptance ever came into existence.
[66] See also dot-points 4 and 7 in Step 6 set out at [39] above.
[67] Given that the Loan was a regulated Loan a loan purpose declaration was not required. A service nomination form (which the appellants had signed - see [67] above), however was required.
As it was, the only documents signed by the appellants that were attached to the mortgage purchase application were the original contract of sale for the property[68] and a copy of their application under the First Home Owner Grant Act 2000 (WA).[69] The attachments did not include a copy of a loan application form. It included neither the accurate but incomplete application form prepared by the appellants[70] nor the fabricated one prepared by Mr Lock or someone at his direction.[71]
AFIG approves the Loan and the Mortgage
[68] Exhibit 74 (GAB 326-327).
[69] Exhibit 74 (GAB 320-325).
[70] See [65] to [67] above.
[71] See [77] to [83] above
On 6 June 2006 AFIG completed a document headed 'Instruction to Solicitor' (the Instruction). The Instruction was addressed to Wignall Solicitors (an approved solicitor) via Yes Home Loans and it stated that AFIG confirmed acceptance of the mortgage and loan detailed in the schedule. The schedule stated that the borrowers were to be the appellants, the mortgagee to be GEL Custodians, the loan to be for $452,000 over 30 years with a five-year interest only period. The monthly repayments were to be $2,595.23 during the interest only period and $3,162.99 for the remainder of the term. The Instruction instructed Wignall Solicitors to prepare and serve the loan contract, mortgage and other ancillary documents and to settle the Loan.[72]
[72] Primary reasons [48].
Also on 6 June 2006 Yes Home Loans forwarded the Instruction to Wignall Solicitors.[73]
The appellants sign the Loan Agreement and the Mortgage
[73] Primary reasons [48].
On 12 June 2006 the appellants received from Wignalls Lenders Mortgage Services (Wignalls) a loan pack. The loan pack included a letter dated 8 June 2006 from Wignalls to Mr Shannon. The letter listed documents that needed to be signed and returned (including the Loan Agreement and the Mortgage). The letter contained the following note:[74]
We recommend you obtain independent advice. Please note we act for the mortgagee and cannot provide advice to you.
[74] Primary reasons [49].
The appellants signed the Loan Agreement and Mortgage documents and returned them to Wignalls on 13 June 2006. The following day, Wignalls sent a facsimile to Yes Home Loans advising that that settlement had been arranged for 19 June 2006.[75]
Settlement and the advance of funds pursuant to the Loan Agreement
[75] Primary reasons [68].
Settlement took place on 19 June 2006.[76] On that day, GEL Custodians advanced $452,000 to the appellants pursuant to the Loan Agreement.[77] On 22 June 2006, the appellants were registered as proprietors of the property and GEL Custodians was registered as mortgagee under the Mortgage.[78]
The appellants default under the Loan Agreement and the Mortgage
[76] Primary reasons [73].
[77] Primary reasons [77].
[78] Primary reasons [75].
In July 2006 the appellants commenced making interest only loan repayments under the Loan.[79]
[79] Primary reasons [80].
On 19 October 2006 the defendants failed to make the loan repayment then due and payable.[80] The defendants failed to make the payments when due and payable each month up to and including May 2007 and again on numerous occasions up until July 2011, when they ceased making payments altogether. Between 2009 and 2011, the appellants also made a number of hardship requests in relation to the Loan.[81]
[80] Primary reasons [81].
[81] Primary reasons [82]-[84].
On 22 March 2011, GEL Custodians' solicitors served a default notice on the appellants, and on 20 February 2012, GEL Custodians commenced enforcement proceedings in this Court (CIV 1276 of 2012). Those proceedings were discontinued on 23 November 2012.[82]
[82] Primary reasons [87] and [89].
On 5 February 2013, GEL Custodians commenced the primary proceedings tried before the learned trial judge. The sum then owing under the Loan Agreement was $581,042.18 (with interest from 4 February 2013 at the rate of 8.27% per annum).[83]
[83] BAB 89.
As at the commencement of the trial, 4 December 2017, the sum outstanding under the Loan Agreement was $1,301,131.80.[84] Interest has been accruing at the rate of 8.27% per annum ever since.
[84] Primary reasons [101].
We turn now to briefly summarise the Primary reasons.
The Primary Reasons
For reasons that will become apparent, in summarising the Primary reasons it is convenient to consider separately the claims other than the claim made pursuant to s 76 of the National Credit Code and then to consider the claim made under the Code.
The claims other than the claim under s 76 of the National Credit Code
As we noted at the commencement of these reasons, the issues in this appeal were largely confined to the question as to whether the transaction giving rise to the Loan Agreement and the Mortgage should be reopened pursuant to s 76 of the National Credit Code, on the ground that the Loan Agreement and the Mortgage are 'unjust' within the meaning of that section.
The issues raised by the appellants at trial (ironically, given that they were then represented) were not nearly as focussed. Together with the ubiquitous 'and/or' form of pleading, the Amended Defence and Counterclaim[85] may properly be described as a 'forest of forensic contingencies',[86] much of which failed to bear fruit in the outcome of the trial.
[85] Amended Substituted Defence and Counterclaim to Plaintiff's Amended Statement of Claim dated 17 November 2017 (Amended Defence and Counterclaim) (BAB 102).
[86]Forrest vAustralian Securities and Investments Commission [2012] HCA 39; (2012) 247 CLR 486 [27] (French CJ, Gummow, Hayne & Kiefel JJ).
The Amended Defence and Counterclaim, for example, in addition to the claim under s 76 of the National Credit Code, pleaded:
(a)four separate misrepresentations by Yes Home Loans and Mr Lock (the Misrepresentations);[87]
(b)that the Misrepresentations were made on behalf of AMS, AFIG and GEL Custodians;[88]
(c)that Yes Home Loans, AMS, AFIG and GEL Custodians engaged in misleading and deceptive conduct contrary to s 12DA(1) of the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act);[89]
(d)that Yes Home Loans, AMS, AFIG and GEL Custodians engaged in unconscionable conduct contrary to s 12CB(1) of the ASIC Act[90] and under the general law;[91]
(e)that Yes Home Loans, AMS, AFIG and GEL Custodians committed fraud;[92]
(f)the Loan Agreement and the Mortgage were entered into on the basis of a common mistake and were void;[93]
(g)Yes Home Loans, AMS, AFIG and GEL Custodians made false and misleading representations contrary to s 154 of the National Credit Code and s 144 of the Consumer Credit (Western Australia) Code; [94] and
(h)The Mortgage was void pursuant to s 214A of the Transfer of Land Act 1893 (WA).[95]
[87] Amended Defence and Counterclaim [3], [22] and [34].
[88] Amended Defence and Counterclaim [25].
[89] Amended Defence and Counterclaim [25].
[90] Amended Defence and Counterclaim [25].
[91] Amended Defence and Counterclaim [48].
[92] Amended Defence and Counterclaim [38].
[93] Amended Defence and Counterclaim [46].
[94] Amended Defence and Counterclaim [45(c)].
[95] Amended Defence and Counterclaim [45(d)].
The Misrepresentations referred to in [113(a)] above played a central role in many of the causes of action pleaded by the appellants. They formed the basis, for example, for the fraud claims, the statutory unconscionability claims and the misleading and deceptive conduct claims.[96]
[96] Amended Defence and Counterclaim [25], [38].
The Misrepresentations fell into two categories.
The First and Second Misrepresentations were said to have been made, by Yes Home Loans to the appellants. In particular:
(a)that in 2006, during its negotiations with the appellants, Yes Home Loans held itself out and represented itself to the appellants to be a lender of home loans and the lender of the then proposed Loan (the First Misrepresentation); and[97]
(b)that, in June 2006, Mr Lock, on behalf of Yes Home Loans, represented to Mr Shannon in a telephone conversation that GEL Custodians was a subsidiary of Yes Home Loans and the trustee of Yes Home Loans (the Second Misrepresentation).[98]
[97] Amended Defence and Counterclaim [3].
[98] Amended Defence and Counterclaim [3].
The Third and Fourth Misrepresentations concern the conduct of Yes Home Loans in relation to persons other than the appellants. While the distinction between the Third and Fourth Misrepresentations is not entirely clear from the pleading,[99] they were identified by the learned trial judge as follows:
(a)that Yes Home Loans altered and/or forged and fabricated the first two pages of the loan application made by the appellants to convey, contrary to the facts, the income, assets and liabilities of the appellants there stated (the forged loan application) (the Third Misrepresentation);[100] and
(b)Yes Home Loans certified to AMS and AFIG, inter alia, that Yes Home Loans was not aware of (or had been able upon reasonable enquiry to ascertain) any reason or circumstance under which the appellants might be unable to pay in accordance with the Loan Agreement or not without substantial hardship and further that, in arranging the policy of mortgage insurance, Yes Home Loans provided to Genworth Financial a copy of the forged loan application (Fourth Misrepresentation).[101]
[99] Amended Defence and Counterclaim [34]-[37].
[100] Primary reasons [205].
[101] Primary reasons [207].
The learned trial judge comprehensively dealt with all of the claims set out in [113(a) to (h)] above.
In that regard, his Honour found that all of the appellants' claims (other than the claim to reopen the Loan Agreement and the Mortgage under s 76 of the National Credit Code) were time-barred under each of the applicable limitation periods.[102] His Honour also declined to extend time within which to commence those claims pursuant to s 38 of the Limitation Act 2005 (WA) (the Limitation Act). In that context, his Honour held (correctly in our view) that the power to extend time under the Limitation Act did not apply to the time limits imposed by laws of the Commonwealth (including the ASIC Act and the National Credit Code).[103]
[102] Primary reasons [147], [199].
[103] Primary reasons [150].
More importantly, the claims other than the claim under s 76 of the National Credit Code were also rejected by the learned trial judge on their merits.
In that regard, his Honour made a number of critical findings of fact in relation to the four Misrepresentations.
In relation to the First and Second Misrepresentations, his Honour rejected the appellants' case that those representations were in fact made, or that the appellants relied upon them. His Honour said:[104]
I am not satisfied that [Yes Home Loans] represented to the defendants that it was the lender of the then proposed loan. The application form states that [Yes Home Loans] is the mortgage manager and the credit provider is each of the organisations named in sch A, which includes Permanent Custodians but not [Yes Home Loans]. In any event, before they signed the Loan Agreement and the Mortgage the defendants read the Loan Agreement and the Mortgage carefully. Those documents clearly identify GEL Custodians as the lender or credit provider and mortgagee.
…
I reject the evidence of the defendants that Mr Lock represented to them that GEL Custodians was a subsidiary of [Yes Home Loans] and the trustee of [Yes Home Loans] for the reasons I have stated. The defendants have not proved the First and Second Misrepresentations. Furthermore, the defendants entered into the Loan Agreement and the Mortgage knowing that they were entering into agreements with GEL Custodians and did not rely upon any representation that the lender was [Yes Home Loans] or that GEL Custodians was a subsidiary of [Yes Home Loans] and the trustee of [Yes Home Loans].
[104] Primary reasons [202]-[204].
The learned trial judge did find that the Third and Fourth Misrepresentations were made by Yes Home Loans and that they were false. That is, his Honour found that Yes Home Loans had engaged in the fraudulent conduct set out in [77] to [82] and [89] to [91] above.[105]
[105] Primary reasons [205], [207].
The learned trial judge nevertheless concluded that the Third and Fourth Misrepresentations were not made to the appellants and, indeed, as was the case, that the appellants did not find out about them until 2012.[106] Not being aware of those Misrepresentations, his Honour (unsurprisingly) found that the appellants had not relied upon them in entering into the Loan Agreement and the Mortgage. Accordingly, his Honour found that the Third and Fourth Misrepresentations were not actionable per se.
[106] Primary reasons [206], [208].
The rejection of the claims based on the Misrepresentations, and in particular the learned trial judge's finding that the appellants had not proved that the First and Second Misrepresentations were in fact made, was fatal to many of the claims made by the appellants at trial, including those that were otherwise time-barred in any event.
The claim under s 76 of the National Credit Code
The appellants' claim under s 76 of the National Credit Code was, in a number of respect, very different to the other claims.
First, that claim was not time barred in any way. At trial the respondents accepted that the National Credit Code applied to the Loan Agreement and the Mortgage and that an application made pursuant to s 76 of the Code was not time barred.
Secondly, as will be seen, while the claim under s 76 of the National Credit Code, relied, in part, upon the (failed) Misrepresentation claims, whether the Loan Agreement and the Mortgage were, relevantly, unjust, raised broader issues, and was a matter to be determined in light of all the circumstances. The evaluative exercise required by s 76 did not depend upon the existence of any one particular circumstance. That is how the learned trial judge approached the issue and how it was approached in the appeal.
After referring to a number of authorities in relation to the jurisdiction to reopen 'unjust transactions', the learned trial judge observed:[107]
The defendants say that in deciding whether a transaction is unjust a court is to have regard to the public interest and may look to all of the circumstances. As I have said, the public interest considerations are consumer protection and upholding bargains. Both must be given weight appropriate in the circumstances.
The defendants have set out a number of matters which they say relate to the matters which, pursuant to s 76(2) of the National Credit Code, the court is to have regard to in determining whether a term of a credit contract or mortgage are just in the circumstances.
[107] Primary reasons [259]-[260].
His Honour then proceeded to individually address a number of the circumstances listed in s 76(2)(a) to (p) of the National Credit Code. His Honour dealt with eleven matters in total.
First, in relation to s 76(2)(a) - the consequences of compliance or non-compliance with the transaction - the learned trial judge said:[108]
The defendants say that if the contracts are not set aside they will lose their home and face bankruptcy due to the Loan, which they did not and do not have the capacity to service, or at least not without more than substantial hardship. If the Loan Agreement and Mortgage are not reopened and set aside or discharged the plaintiff will be given judgment for a sum exceeding $1 million and possession of the Land. The defendants will lose their home. That consideration is relevant but is lessened somewhat by the facts that the defendants acquired that home by entering into the Loan Agreement and the Mortgage and have lived in it for 12 years notwithstanding that they made only three monthly loan repayments before defaulting in October 2006, failed to make the monthly payments from then until May 2007 and failed to make the monthly repayments on numerous occasions from May 2007 until July 2011 when they ceased making any payments.
More importantly, a contract will not be unjust merely because it was not in the claimant's interest to enter into it, or because the claimant cannot perform when called upon to do so, or because enforcement of the contract will lead to the loss of the claimant's home: Esanda Finance Corp Ltd v Viet Nho Tong & Thi Kim Lien Tong (1997) 41 NSWLR 482 per Handley JA at 491.
[108] Primary reasons [261]-[262].
Secondly, in relation to s 76(2)(b) - the relative bargaining power of the parties - his Honour said:[109]
If a contract or its relevant provisions is neither unfair nor unreasonable it is difficult to see how the existence of any inequality of bargaining power or lack of independent advice, for example, can render a contract or a provision of the contract unjust: West [621].
[109] Primary reasons [263], referring to West v AGC (Advances) Ltd (1986) 5 NSWLR 610 (West v AGC).
Thirdly, in relation to s 76(2)(d) - the practicability of the appellants being able to negotiate the provision of the contracts - the learned trial judge said:[110]
The defendants say that having committed the defendants (without their knowledge) to a settlement on 19 June 2006, YHL exploited that fact to allow the defendants no time to consider the terms of or seek advice upon the contracts. The defendants say they had no realistic opportunity to negotiate, alter or reject any terms. I have found that YHL did not commit the defendants 'without their knowledge' to a settlement on 19 June 2006. YHL, by Mr Lock, informed Elders Real Estate that the defendants' finance had been approved at the urging of the defendants. Mr Shannon pressed Mr Lock to inform Elders of finance approval by his email of 18 May 2006 and his telephone call to Mr Lock on 22 May 2006. Mr Shannon says that he knew the proposed term of the loan and the interest rate. Indeed, he claims the interest rate was one of the matters that made him approach YHL. The defendants did not simply sign the Loan Agreement and Mortgage because they had no other option. They spent hours reading through the terms. They did not at the time identify any terms they considered to be harsh or unjust. They claim to have spoken to Mr Lock by telephone on 13 June 2006 but did not seek to negotiate or change any of the terms or raise any question about any of the terms.
[110] Primary reasons [264].
Fourthly, in relation to s 76(2)(e) - the difficulty of compliance with the provisions of the contracts - the learned trial judge said:[111]
The defendants say that the Loan Agreement imposed conditions (that is repayment) on the defendants' actual financial position that were not only unreasonably difficult to comply with, they could not be complied with. The defendants knew the amount of the contractual repayments. They turned their minds to whether they could make the repayments without substantial hardship. They considered they could do so because they had been able to make similar payments for rent previously. They knew how their circumstances had changed since that time, albeit they did not have any financial statements for their business available at that time. Neither GEL Custodians nor YHL made any representations to the defendants concerning their capacity to make the repayments. YHL did not make any representations to induce the defendants to enter into the agreements. To the contrary, the defendants approached YHL. The defendants did not provide YHL with any information concerning their financial situation notwithstanding that they knew the loan application form required such information.
[111] Primary reasons [265].
Fifthly, in relation to s 76(2)(g) - the form and intelligibility of the contracts - the learned trial judge said:[112]
The defendants say that the Terms and Conditions were missing from the loan package as was advice about the need for financial advice. I have found that either the Terms and Conditions document was enclosed in the loan pack or the defendants knew that the terms and conditions of the Loan Agreement included terms and conditions in a separate document and were content to enter into a contract which included those terms and conditions without receiving a copy of it. There are no terms in the Terms and Conditions document which are unusual in a Loan Agreement or which are themselves harsh or unjust.
[112] Primary reasons [266].
Sixthly, his Honour said, in relation to s 76(2)(h) - independent legal or expert advice:[113]
The defendants did not obtain independent legal or other expert advice. The letter which accompanied the loan pack recommended the defendants obtain independent advice. I am satisfied that the defendants read and understood that recommendation. They elected not to obtain legal or other expert advice. Any time constraints upon the defendants was a matter of their own doing - YHL informed Elders of the defendants' finance approval at the urging of the defendants.
[113] Primary reasons [267].
Seventhly, in relation to s 76(2)(i) - any explanation of, and the appellant's understanding of the provisions and their effect - the learned trial judge said:[114]
GEL Custodians did not explain to the defendants the legal and practical effect of the Loan Agreement and the Mortgage. I am not satisfied that the defendants did not understand the provisions and their effect. The defendants understood the amount of the Loan, the term of the Loan, the rate of interest and the repayments. The defendants signed an acknowledgement that they had read and understood the nature and effect of the Loan Agreement and the security referred to in the Loan Agreement, that is the Mortgage.
[114] Primary reasons [268].
Eighthly, in relation to s 76(2)(j) - the use of any unfair pressure - his Honour said:[115]
The defendants say that YHL exerted unfair pressure on the defendants to sign and return the documents without a proper understanding, without any opportunity to obtain it and their lack of understanding was underlined by the fact that the material terms and conditions to the Loan Agreement were not included. I am not satisfied that YHL exerted unfair pressure on the defendants to sign and return the documents. As I have said, Mr Shannon pressed Mr Lock to inform Elders Real Estate that finance had been approved. The defendants did not simply sign the documents and return them without reading them because of any pressure exerted. To the contrary, they spent hours reading them before signing them and returning them.
[115] Primary reasons [269].
Neutral circumstances
[325] See the contention recorded at Primary reasons [271].
The primary judge relied on various other circumstances in concluding that the Loan Agreement and the Mortgage were not unjust. One of them was that the Shannons signed the loan application form in blank with no information concerning their income and assets and liabilities. The primary judge characterised this as 'careless' and as having 'facilitated the fraud by YHL'.[326] This was challenged by ground 10. I do not accept that this aspect of the Shannons' conduct was careless. All the more so I do not accept that it facilitated YHL's fraud in a way which adversely affects the Shannons' claim pursuant to s 76.
[326] Primary reasons [283].
I appreciate that in Tonto Home Loans Australia Pty Ltd v Tavares Allsop P considered that the borrowers' conduct in signing incomplete or blank documents was careless and gave the opportunity for fraud.[327] The facts in Tonto Home Loans Australia Pty Ltd were different to the present case. In the present case Mr Lock was well known to the Shannons. There is nothing in the facts to suggest that the Shannons knew or ought to have known or were otherwise on notice that Mr Lock or YHL might engage in fraudulent activities of the type that occurred. To all outward appearances, YHL was a reputable mortgage lending originator and manager and Mr Lock was acting properly as an officer of YHL. Members of the public who have engaged a professional service provider are entitled to expect that the provider (and its officers) will act honestly unless and until put on notice of circumstances that might suggest the contrary - all the more so where the relevant person is known personally and there is no reason to believe that he or she will engage in fraudulent and dishonest activities.
[327] Tonto Home Loans Australia Pty Ltd v Tavares [261].
In the circumstances I do not accept that the Shannons were careless in submitting the loan application form with blank pages. For the reasons already stated I accept that the failure to provide any financial information is a circumstance militating against a finding that the Loan Agreement and the Mortgage were unjust. But this is not because the Shannnons were careless by making themselves vulnerable to YHL's fraud. I am unable to accept that a reasonable person in the Shannons' position would have struck through all parts of the loan application which were not completed - which, in substance, is what is suggested in finding that the Shannons were careless and facilitated the fraud committed by YHL.
Ground 10 should be upheld insofar as it challenges this aspect of the primary judge's reasoning.
There are other circumstances which I also consider to be essentially neutral in terms of whether the Loan Agreement and the Mortgage were unjust:
1.This is not a case where inequality in bargaining power could render the Loan Agreement and the Mortgage unjust (see s 76(2)(b)). The contractual provisions were neither unfair nor unreasonable.[328]
2.Nor, for the same reason, was the lack of negotiation of the contractual provisions - and the fact that it was not reasonably practicable for the Shannons to seek the modification or rejection of the contractual provisions - of any significance to the evaluative judgement required by s 76(1) (see s 76(2)(c) - (d)).
3.GEL Custodians did not explain the legal and practical effect of the Loan Agreement and the Mortgage to the Shannons (see s 76(2)(i)).[329] This omission is of no practical significance given the finding that the Shannons understood the legal and practical effect of entering into the Loan Agreement and the Mortgage as referred to at [413.4] above.
[328] West v AGC (Advances) Ltd (621).
[329] Primary reasons [268].
In concluding that the Loan Agreement and the Mortgage were not unjust the primary judge also relied on the relationship between the Shannons and Mr Lock - they being said to be 'fairly close friends' - and that the Shannons urged and pressed YHL to obtain finance approval for the loan.[330]
[330] Primary reasons [286].
I regard both matters as being essentially neutral for the purpose of the s 76 evaluation. The friendship between the Shannons and Mr Lock had no bearing on YHL's fraudulent conduct. There is no suggestion that the Shannons were involved in or aware of YHL's fraudulent conduct. The fact that there was a friendship between the Shannons and Mr Lock provides no fiat to attribute any wrongdoing to the Shannons. In any event, the friendship between the Shannons and Mr Lock is balanced out by the commercial relationship between YHL and AFIG. Even less significance may be attached to the Shannons having urged and pressed YHL to obtain finance approval. YHL, by Mr Lock, was approached to obtain finance prior to entry into the contract to purchase the property. The contract was conditional on finance approval being obtained by 22 May 2006. It is entirely unsurprising that the Shannons would have been urging and pressing YHL to obtain the finance approval within the time provided for under the contract to purchase the property. The Shannons' actions in doing so are of no consequence for finding the Loan Agreement and the Mortgage to be 'unjust' or 'not unjust' for the purposes of s 76 of the National Credit Code.
Circumstances in favour of the Loan Agreement and the Mortgage being 'unjust'
The primary judge considered that any unjustness arose, if at all, by reason of YHL's fraud practised on AFIG and GEL Custodians and the Shannons' inability to meet the mortgage repayments without substantial hardship or at all.[331]
[331] Primary reasons [280].
While those circumstances are certainly to be taken into account, they are not, in my view, the only circumstances that militated in favour of a finding that the Loan Agreement and the Mortgage were unjust. Nor, in my view, was this characterisation of the two circumstances a sufficient description which explained why those circumstances tended to show that the Loan Agreement and the Mortgage were unjust. Having made those general observations I turn to the circumstances that militate in favour of a finding that the Loan Agreement and the Mortgage were unjust.
I have regard to the following:
1.One consequence of non-compliance with the Loan Agreement and the Mortgage is that - given that the Shannons could not afford the loan - the Shannons will lose their home if the transaction is not re-opened (see s 76(2)(a)). The primary judge took this into account.[332] The weight to be attributed to this circumstance is, in my view, lessened by the circumstance that the property could not have been purchased without entry into the Loan Agreement and the Mortgage. This is not a case where a borrower or guarantor risked his or her pre-existing property by entry into an improvident loan. There is, however, some suggestion that the Shannons have made payments in repairs and improvements to the property. There were also funds applied by the Shannons to the purchase as borrowed from Mr Shannon's mother.
2.A further consequence of non-compliance with the Loan Agreement and the Mortgage is that the Shannons have incurred a substantial interest obligation without the means to meet that obligation.
3.The Shannons were not involved in, or aware of, YHL's dishonest and fraudulent conduct. In this regard it should be recalled that the primary judge observed that the principal wrongdoing was the fraud of YHL and found, in substance, that this was not attributable to the relevant respondents as YHL was not the agent of AFIG or GEL Custodians in making the loan application.[333] It is, in my view, equally important to observe that the Shannons did not in fact participate in and were not aware of the fraudulent conduct on the part of YHL.
[332] Primary reasons [261].
[333] Primary reasons [285].
In that last respect, the Shannons as prospective debtors and GEL Custodians as prospective lender are both 'innocent' parties - neither knew of the fraud practised by YHL in the arrangement of the Loan Agreement and the Mortgage (although, as accepted by the respondents, AFIG and thus GEL Custodians are taken to be aware of the falsity of the mortgage purchase application).
YHL was not a stranger to either the Shannons (through the personal connection with Mr Lock) or the relevant respondents (given YHL's role under the Correspondent Deed). It is, however, of significance and I have regard to the circumstances that:
1.The structure adopted by the relevant respondents pursuant to the ARMS III mortgage loans originating and management program outsourced to YHL in its entirety the task of obtaining satisfaction as to an intended borrower's ability to afford a loan. Accordingly, the business structure put in place by the relevant respondents put both them and the Shannons at risk in the event that YHL did not perform its obligations, for reasons of fraud or otherwise.
2.The mortgage purchase application submitted by YHL to AFIG was not compliant with the guidelines as formulated for the ARMS III mortgage loans originating and management program: the application was not supported by either (1) a loan proposal letter; or (2) a service nomination form. Separately, the primary judge found that the procedures in the Correspondent Deed and the Operations Manual were not complied with.[334]
[334] Primary reasons [274].
In terms of the first matter - the business structure - as the loan was in an amount under $500,000, YHL was not required to provide AFIG with the Shannons' loan application form (meaning AFIG was not required to be supplied with an asset and liability statement), evidence of income or other relevant background and supporting documentation. Nor, as it happened, was information of that kind in fact provided by YHL to AFIG or GEL Custodians. AFIG only received a mortgage purchase application, the schedules thereto (which had the false statements as to the Shannons' employment status and whether YHL held evidence of their income and equity), a valuation of the property, the lenders mortgage insurance acceptance advice, a 100 point check identification record, a copy of the Shannons' first home owner grant application form and a copy of the contract to purchase the property.
Accordingly, in terms of the permissive consideration prescribed by s 76(2)(l) of the National Credit Code, the relevant respondents received no first-hand information and could conduct no verification as to the credit worthiness of the Shannons and no assessment of the Shannons' ability to meet the obligations under the Loan Agreement and the Mortgage - either at all or without substantial hardship. The relevant respondents did not place themselves in a position, personally, to satisfy themselves of the Shannons' ability to afford the proposed loan. Instead, AFIG (and thereby GEL Custodians) relied solely on YHL and made no inquiries of its own.
In particular, in assessing whether the Shannons could pay the proposed loan in accordance with the Loan Agreement and the Mortgage without substantial hardship or at all, AFIG (and thereby GEL Custodians) could do no more than rely - and rely exclusively - on:
1.YHL's representation and warranty under cl 12.1(g) of the Correspondent Deed - a representation and warranty to the effect that the loan application had been fully investigated in accordance with the Operations Manual and YHL (see [31] above).
2.The credit analysis and borrower's income verification and evaluation obligations on the part of YHL as provided for in pt 4.5 and pt 4.6 of the Operations Manual - including that YHL was completely satisfied, having made all reasonable inquiries, that the borrower would be able to meet the obligations under the loan contract without substantial hardship (see [34] above).
3.YHL's certification under and the other information in the mortgage purchase application - the certification being to the effect that the loan met the criteria in the Operations Manual and, among other things, that YHL had not been able to ascertain by reasonable inquiry any reason why the Shannons might be unable to pay in accordance with the loan contract or not do so without substantial hardship (see [89] above).
The primary judge made a finding that the Shannons made the loan application and entered into the Loan Agreement without making any proper inquiry or assessment whether they could make the repayments without substantial hardship or at all.[335] On appeal the Shannons submitted that was equally the position with the relevant respondents.[336] Senior counsel for the respondents accepted the essential premise of the Shannons' submission stating that, in substance, the same position held true for AFIG and GEL Custodians.[337] They too had no relevant financial statements and had made no attempt to determine the Shannons' income and expenses over the preceding 12 months or the present profitability and projected income the Shannons would derive in the short to medium term. The relevant respondents contended, however, that in terms of who should bear responsibility as between the Shannons and the relevant respondents, it was material that AFIG and GEL Custodians played no part in the Shannons' decision to take the loan: it was entirely their decision.[338]
[335] Primary reasons [284].
[336] Appeal ts 134.
[337] Appeal ts 172.
[338] Appeal ts 172 - 174.
I will return to this argument and, separately, to the significance of the business structure employed in the ARMS III mortgage loans originating and management program. It is necessary, first, to say something about the second matter, ie the fact that the mortgage purchase application as submitted by YHL to AFIG was not compliant with the relevant respondents' own guidelines.
I accept that departure from a lender's own lending guidelines does not in itself establish the injustice of a loan.[339] There is also much force in the respondents' post-hearing submissions - and I accept - that the absence of these particular documents caused no appreciable disadvantage to the Shannons.[340] The documents would not, of themselves, have conveyed any information about the Shannons' financial position and their ability to service the proposed loan. Nevertheless, in my view, the matter is a circumstance to which regard ought to be had in evaluating whether the Loan Agreement and the mortgage were unjust: the absence of these documents from the mortgage purchase application indicated that the mortgage purchase application, as submitted, did not comply with the procedures established in the Operations Manual.
[339] Kowalczuk v Accom Finance Pty Ltd [117] (see also [102]).
[340] Respondents' supplementary submissions dated 16 October 2020 pars 13 - 16.
The relevance is not just that AFIG and GEL Custodians were prepared to lend when their own guidelines were not applied with appropriate commercial vigour and that the operation of the guidelines could be characterised as loose. The more significant ramification is that AFIG (and thereby GEL Custodians) knew of or at the least ought to have known of YHL's failure to follow these procedures as established in the Operations Manual. That should have been a matter of concern to any reasonable lender where, as in the present case, the lender had by the business structure it employed deliberately divested itself of and relinquished to an independent mortgage lending originator and manager the tasks of investigating whether - and obtaining satisfaction that - the intended borrower was able to afford the loan without substantial hardship.
The inherent risk presented by the business structure adopted by the ARMS III securitisation program, and its reliance on YHL's proper and diligent performance of its duties as independent mortgage lending originator and manager, ought, in my view, to have increased the relevant respondents' sensitivity to and awareness of any failures on the part of YHL.
In this case the significance of YHL's non-compliance with the procedures under the Operations Manual was made more acute by the knowledge of YHL that was to be attributed to GEL Custodians. That knowledge was not merely that the Shannons had not provided details of their income and their assets and liabilities.[341] It included that:
1.The information about the Shannons' financial circumstances as stated in the lenders mortgage insurance application was false.
2.The mortgage purchase application provided to AFIG by YHL was false.
[341] Compare Primary reasons [272] (the primary judge noting only that '[t]he knowledge of YHL that may be attributed to GEL Custodians is that [the Shannons] had not provided any details of their income, assets or liabilities').
The last aspect of the constructive knowledge to be attributed to GEL Custodians was not mentioned by the primary judge. It was, however, accepted on behalf of the respondents at the appeal hearing (see [369] above). The respondents' concession was properly made. Once there was constructive knowledge that no financial information was provided to YHL it necessarily followed that the mortgage purchase application was false. Schedule 2 to the mortgage purchase application stated, positively, that YHL held evidence of the Shannons' income and equity on file.[342] That could not be the case if no financial information was provided to YHL. Nor, in the absence of such financial information, could it be accepted that YHL had made reasonable inquiry as to whether the Shannons might be unable to pay in accordance with the terms set out in the loan contract or not do so without substantial hardship - that being the implied representation conveyed by the certification that formed part of the mortgage purchase application (see [89] above).
[342] GAB 311.
The primary judge held that, given the Shannons' lack of financial statements, reasonable inquiry would not have disclosed that the Shannons were unable to make repayments without substantial hardship: it would only have disclosed that the Shannons did not have available financial statements to substantiate their belief that they could make the repayments without substantial hardship.[343]
[343] Primary reasons [272].
To similar effect, senior counsel for the respondents argued that, even accepting that the relevant respondents knew of the fraudulent information given to Genworth Financial (as lenders mortgage insurer) by YHL and the absence of any information as to the Shannons' true financial position, it was not possible to conclude that the relevant respondents ought to have gone further and drawn the inference that the Shannons could not pay in accordance with the terms of the Loan Agreement or not do so without substantial hardship. Senior counsel contended that the transaction should be assessed on the basis that the lender knew nothing about the financial position of the Shannons or their ability to make repayments without substantial hardship.[344]
[344] Appeal ts 172, 178 - 179. See also Appeal ts 182.
Let that be accepted. The absence of such knowledge does not mean that the Loan Agreement and the Mortgage are not unjust. There is no need to establish moral obloquy or knowledge of the reasonably foreseeable consequences of the Loan Agreement for the Shannons. Moreover, the absence of such knowledge in no way establishes that the relevant respondents made reasonable inquiry as to whether the Shannons could pay the monthly payments under the proposed loan without substantial hardship. Nor does it establish that the relevant respondents reasonably believed, albeit mistakenly, that the Shannons could pay the monthly payments under the proposed loan without substantial hardship.
In both respects the opposite is true. The relevant respondents are taken to know that the Shannons had not provided details of their income and their assets and liabilities and that the mortgage purchase application as submitted by YHL was false in material respects. That circumstance is incompatible with the making of reasonable inquiries - or even a belief that there had been reasonable inquiries - and having reason to believe that the Shannons could pay the monthly payments under the proposed loan without substantial hardship. A prospective lender could not reasonably hold such a belief where it was aware that no financial information had been provided by the intended borrower. On appeal the respondents did not go so far as to contend that there was such a belief. There was simply a disclaimer of any knowledge whatsoever as to the Shannons' ability to make repayment. Nevertheless, having regard to their knowledge, the relevant respondents had no reason to believe, positively, that the Shannons could pay the monthly payments under the proposed loan without substantial hardship.
Accordingly, even accepting the position advanced by the respondents on appeal, the absence of a positive finding that the relevant respondents knew that the Shannons could not pay in accordance with the terms of the Loan Agreement and the Mortgage (or not do so without substantial hardship) does not overcome adverse findings in these other, different, respects.
It will be apparent from what I have said that, in all the circumstances of the present case, I am unable to accept that it was proper and right for AFIG and GEL Custodians to rely on the matters referred to in [435] above. Their knowledge that the Shannons had not provided any financial information, and of the falsity of the mortgage purchase application in material particulars, precluded such reliance.
The ARMS III securitisation program contemplated lending in which reasonable inquiry was made of the prospective borrower as to whether he or she would be able to meet the loan obligations without substantial hardship. The Operations Manual provided that a loan application should not be submitted for purchase unless YHL, as the mortgage lending originator and manager, was 'completely satisfied, having made all relevant enquiries … that the borrower will be able to meet its obligations … without substantial hardship'.[345] That safeguard was primarily for the protection of the GEL Custodians. It, nevertheless, provided an indirect benefit for a prospective borrower. A prospective borrower - generally less commercially sophisticated and more financially naïve than the relevant respondents and in any event less able to objectively consider his or her ability to meet loan repayments without substantial hardship - would not be saddled with an unaffordable loan.
[345] See [34] above.
The absence of reasonable inquiry as to whether a prospective borrower will be able to meet its obligations under a proposed loan without substantial hardship is accepted to be a circumstance that may be taken into account in evaluating whether a credit contract was unjust. Having regard to their actual and attributed knowledge, the relevant respondents were on notice that the structure they had employed to assess a prospective borrower's ability to meet its obligations under a proposed loan without substantial hardship had failed in relation to the Shannons. The relevant respondents were on notice that reasonable inquiry had not been carried out and had no reason to believe that the Shannons could afford the proposed loan without substantial hardship.
I do not suggest that the relevant failure is one of failure to detect and appreciate that YHL's conduct was fraudulent and dishonest. Rather, it is the twofold failure of:
1.First, the structure employed by the ARMS III securitisation program - which depended on independent mortgage lending originators and managers executing their duties properly and diligently.
2.Second, the relevant respondents continuing to rely on the failed structural safeguards - and not themselves making reasonable inquiry as to whether the Shannons would be able to meet their obligations under the proposed loan without substantial hardship - in circumstances where:
(a)the relevant respondents had the actual and attributed knowledge as previously referred to - including that the mortgage purchase application was non-compliant and false in material particulars and that the Shannons had not provided any financial information to YHL; and
(b)the relevant respondents were thus on notice that the structure they had employed had failed and, consequently, that there had been no reasonable inquiry as required by the various constituent instruments comprising the ARMS III securitisation program, and that there was no reason to believe that the Shannons could afford the proposed loan without substantial hardship.
GEL Custodians proceeded with the Loan Agreement and the Mortgage despite that failure. The relevant respondents' attitude was one of indifference and lack of concern as to whether or not the proposed loan was suitable for the Shannons as prospective borrowers. The relevant respondents were prepared to assume the risk presented by the loan pursuant to the Loan Agreement and the Mortgage despite their knowledge as referred to and having no reason to believe that there had been a reasonable inquiry as to whether the Shannons would be able to meet their obligations under the proposed loan without substantial hardship. There was no or no adequate consideration of the position of the Shannons. From the relevant respondents' perspective, it was enough that there would be adequate security (given the valuation) and that lenders mortgage insurance was in place.
These matters are not swept away and rendered inconsequential by the respondents' submission that AFIG and GEL Custodians played no part in the Shannons' decision to take the loan (see [436] - [437] above).
I accept that the Shannons' decision to enter into the Loan Agreement and the Mortgage was entirely their own decision; it was not contributed to by any suggestion on the part of the relevant respondents. Moreover, as the primary judge found, the Shannons acted without making any proper inquiry or assessment. But the question whether a credit contract is unjust requires an examination of the position of both parties. The Shannons' failures do not automatically, without more, render the Loan Agreement and the Mortgage not unjust. It is necessary to have regard to all the circumstances of the case and the public interest. Those circumstances include the failures on the part of the relevant respondents, as identified above, which must be weighed in the balance with all the circumstances including the failures on the part of the Shannons.
Conclusion: the Loan Agreement and the Mortgage were 'unjust'
I have identified the circumstances to which it is necessary to have regard in evaluating whether the Loan Agreement and the Mortgage were unjust at the time they were entered into. It is now necessary to come to a conclusion on the question of unjustness having regard to the public interest and those circumstances.
This case is very finely balanced. The Shannons bear considerable responsibility for the predicament in which they found themselves. It was the Shannons alone who decided - without proper inquiry or reasonable grounds - that they could afford the monthly loan payments when they could not. It was the Shannons who failed to provide any financial information in the loan application form. The Shannons understood the material terms and effect of the Loan Agreement and the Mortgage. Putting aside the fraudulent and dishonest conduct of YHL, the terms of the Loan Agreement and the Mortgage - and the circumstances of the Shannons' entry into those instruments - are unexceptional. The case undoubtedly engages the well-established public interest in a competent person being bound by and having to honour an agreement where the agreement was entered into freely without conduct by the counterparty that vitiates the competent person's assent.
The countervailing circumstances - those which support a finding that the Loan Agreement and the Mortgage were unjust - engage the protective aspects of the public interest served by s 76.
One purpose of the legislation is to protect persons who are not able to look after themselves. I do not suggest that the Shannons were at some constitutional disadvantage which affected their ability to make a judgment as to their best interests. However, on the matter of whether reasonable inquiry was made as the Shannons' ability to meet their obligations without substantial hardship - and whether there had been adherence to the relevant respondents' own lending guidelines - the relevant respondents were far better situated than the Shannons. The relevant respondents were aware of or on notice of the various failures I have referred to. Unlike the Shannons, the relevant respondents were in a position to appreciate the potential consequences of and to rectify the risk arising from the failure of the structure employed in the ARMS III securitisation program. Moreover, as is apparent from the passages I have reproduced from Tonto Home Loans Australia Pty Ltd v Tavares at [400] - [401] above, the public interest is served by encouraging lenders to 'rigorously apply' such safeguards as will protect against the risk of lending to duped, misled or inappropriate borrowers (the Shannons falling within the last category).
True it is that, in this case, the Shannons' failure to provide any financial information is one of the relevant factual circumstances. I have already noted the incongruity that thereby arises so far as the Shannons now rely on the relevant respondents' failure to make reasonable inquiry. Nevertheless, the protective component of the public interest engaged by s 76 is not only for those potential debtors who can and do look after themselves; it applies, with greater reason, to those who lack commercial sophistication or financial experience. The latter will often lack the knowledge and skills to make an informed and prudent decision in keeping with their individual needs and circumstances.
The Shannons lacked financial experience of the kind presented by entry into the Loan Agreement and the Mortgage. They were, as the relevant respondents knew - first home buyers. The comparative positions of the relevant respondents and the Shannons is one of the circumstances of the case to which I have regard - it, to a degree, lessens the significance of the Shannons' failure to provide any financial information in support of the loan application.
I will not repeat all the circumstances I have referred to at [428] - [454] above. The critical matter, in my view, is that before providing the Shannons with the loan pursuant to the Loan Agreement and the Mortgage the relevant respondents were on notice of the failure of procedures under the ARMS III securitisation program - in particular that there had been no reasonable inquiry as to whether the Shannons would be able to meet their obligations without substantial hardship. The relevant respondents had no reason to believe that the Shannons could meet their obligations under the proposed loan without substantial hardship. However, the relevant respondents are taken to know that the Shannons did not provide any financial information to YHL and thus of the material falsity in the mortgage purchase application.
The relevant respondents proceeded with the Loan Agreement and the Mortgage notwithstanding these matters. They did so without making their own inquiry as to the Shannons' financial position and ability to meet the monthly loan payments either at all or not without substantial hardship. The relevant respondents were indifferent to whether the Shannons could afford the proposed loan and - despite the matters referred to in [461] above - were prepared to assume the risk that the Shannons could not afford the proposed loan.
The relevant respondents' own procedures contemplated that reasonable inquiry would be made of any prospective borrower. YHL, as independent mortgage lending originator and manager, was to be satisfied - having made all reasonable inquiries - that the prospective borrower would be able to meet the loan obligations without substantial hardship. That was a safeguard which indirectly guarded against conduct that which might otherwise be productive of injustice to members of the public. It was a procedure which promoted suitable borrowings and minimised the risk of lending to an inappropriate borrower who could not afford a proposed loan.
The absence of any reasonable inquiry, despite the critical nature of the various matters known or taken to be known and of which the relevant respondents were on notice, is highly material in evaluating whether the Loan Agreement and the Mortgage were unjust in the circumstances relating to them at the time they were entered into. As between the parties, AFIG (and thereby GEL Custodians) was better placed to identify the failures that had occurred and the risk they presented. So too AFIG (and thereby GEL Custodians) was better placed to rectify the failures and thereby eliminate or minimise the risk that had ensued. AFIG could have done so by requiring information about the Shannons' capacity to service the proposed loan.
It cannot be determined whether, had inquiry been made, the relevant respondents would have uncovered YHL's fraudulent and dishonest conduct. What can be said is that, had inquiry been made of the Shannons, the relevant respondents would have become aware that: (1) the Shannons only source of income was the E-News Direct business; and (2) the Shannons did not have any available financial statements to substantiate their belief that they could make mortgage repayments without substantial hardship.[346] That would not have been sufficient to satisfy the criteria provided for in pt 4.5 and pt 4.6 of the Operations Manual (see [34] above). Either the loan would have been refused or - if it had not - the relevant respondents' indifference to their own lending guidelines and the Shannons' ability to afford the proposed loan would have been patent.
[346] See Primary reasons [272], [284].
Having regard to and weighing all the circumstances of the case, and the competing aspects of the public interest, I am satisfied that, in the circumstances relating to the Loan Agreement and the Mortgage at the time they were entered into, the Loan Agreement and the Mortgage were unjust. The tipping point, in my view, is the relevant respondents' willingness to assume the risk created by the failure of procedures under the ARMS III securitisation program, and indifference to whether the Shannons could afford the proposed loan, in proceeding with the proposed loan without making reasonable inquiry in terms of s 76(2)(l) despite: (1) knowing that financial information had not been provided and of the falsity of the mortgage purchase application; and (2) being on notice of the failure of the procedures under the ARMS III securitisation program - thus having no reason to believe that the Shannons could afford the loan without substantial hardship.
It should not be thought that my conclusion that the Loan Agreement and the Mortgage were unjust means that, in every case, a credit provider who fails to make reasonable inquiry in terms of s 76(2)(l) will be susceptible to an adverse finding in terms of s 76(1) of the National Credit Code. My conclusion is a matter of evaluative judgement based on all the particular and distinctive circumstances of this case after having had regard to and evaluating the public interest in the particular and distinctive circumstances of this case.
Conclusion and orders
I would, for the reasons I have set out above, uphold the essential complaint made by the Shannons as is the subject of grounds 3, 4, 11, 16 and 17 as well as upholding ground 10. I consider, respectfully, that the primary judge erred in not being satisfied that, in the circumstances relating to the Loan Agreement and the Mortgage at the time they were entered into, the Loan Agreement and the Mortgage were unjust within the meaning and for the purpose of s 76(1) of the National Credit Code. Accordingly, I would allow the appeal.
In allowing the appeal, I, like Quinlan CJ & Tottle J, would declare that the Loan Agreement and the Mortgage were unjust within the meaning and for the purpose of s 76(1) of the National Credit Code (see [329], [345] above).
This court is not at present in a position to mould any consequential relief. Indeed, in my view, it is premature to conclude that consequential relief ought to be ordered. Whether there should be consequential relief, and if so the nature and extent of that consequential relief, ought to await a further hearing. It is, however, appropriate that I express my general agreement with what is stated in the joint reasons at [328] and [330] - [335] above. I also agree that the parties should be referred to mediation before any further steps are taken in the litigation.
I am, however, not persuaded that this court should necessarily undertake the task of determining what orders, if any, should be made by way of consequential relief. Depending on the parties' respective positions - and the extent to which additional evidence may be sought to be adduced and allowed - remittal to the General Division might be a more practicable alternative. Subject to the parties having first attended the mediation contemplated in the joint reasons, I would grant the parties liberty to apply to make further submissions as to whether any application for consequential relief should be heard by this court or determined in the General Division.
I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
AK
Research Associate to the Honourable Chief Justice Quinlan
24 NOVEMBER 2020
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